CROSS ELASTICITY OF DEMAND In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the

demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be: Formula The formula used to calculate the coefficient cross elasticity of demand is .

or:

Results for main types of goods In the example above, the two goods, fuel and cars (consists of fuel consumption), are complements; that is, one is used with the other. In these cases the cross elasticity of demand will be negative, as shown by the decrease in demand for cars when the price of fuel increased. Where the two goods are substitutes the cross elasticity of demand will be positive, so that as the price of one goes up the demand of the other will increase. For example, in response to an increase in the price of carbonated soft drinks, the demand for noncarbonated soft drinks will rise. In the case of perfect substitutes, the cross elasticity of demand is equal to positive infinity. Where the two goods are independent, or, as described in consumer theory, if a good is independent in demand then the demand of that good is independent of the quantity consumed of all other goods available to the consumer, the cross elasticity of demand will be zero: as the price of one good changes, there will be no change in demand for the other good.

Two goods that complement each other show a negative cross elasticity of demand: as the price of good Y rises, the demand for good X falls

Two goods that are substitutes have a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises

Two goods that are independent have a zero cross elasticity of demand: as the price of good Y rises, the demand for good X stays constant

When goods are substitutable, the diversion ratio, which quantifies how much of the displaced demand for product j switches to product i, is measured by the ratio of the cross-elasticity to the own-elasticity multiplied by the ratio of product i's demand to product j's demand. In the discrete case, the diversion ratio is naturally interpreted as the fraction of product j demand which treats product i as a second choice, measuring how much of the demand diverting from product j because of a price increase is diverted to product i can be written as the product of the ratio of the cross-elasticity to the own-elasticity and the ratio of the demand for product i to the demand for product j. In some cases, it has a natural interpretation as the proportion of people buying product j who would consider product i their "second choice".

METHODS OF MEASURING OF NATIONAL INCOME A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), and net national income (NNI). All are especially concerned with counting the total amount of goods and services produced within some "boundary". The boundary may be defined geographically, or by citizenship; and limits on the type of activity also form part of the conceptual boundary; for instance, these measures are for the most part limited to counting goods and services that are exchanged for money: production not for sale but for barter, for one's own personal use, or for one's family, is largely left out of these measures, although some attempts are made to include some of those kinds of production by imputing monetary values to them. Mr. Ian Davies defines development as 'Simply how happy and free the citizens of that country feel.' NATIONAL ACCOUNTS Arriving at a figure for the total production of goods and services in a large region like a country entails a large amount of data-collection and calculation. Although some attempts were made to estimate national incomes as long ago as the 17th century, the systematic keeping of national accounts, of which these figures are a part, only began in the 1930s, in the United States and some European countries. The impetus for that major statistical effort was the Great Depression and the rise of Keynesian economics, which prescribed a greater role for the government in managing an economy, and made it necessary for governments to obtain accurate information so that their interventions into the economy could proceed as much as possible from a basis of fact. MARKET VALUE In order to count a good or service it is necessary to assign some value to it. The value that the measures of national income and output assign to a good or service is its market value the price it fetches when bought or sold. The actual usefulness of a product (its use-value) is not measured assuming the use-value to be any different from its market value. Three strategies have been used to obtain the market values of all the goods and services produced: the product (or output) method, the expenditure method, and the income method. The product method looks at the economy on an industry-by-industry basis. The total output of the economy is the sum of the outputs of every industry. However, since an output of one industry may be used by another industry and become part of the output of that second industry, to avoid counting the item twice we use, not the value output by each industry, but the value-added; that is, the difference between the value of what it puts out and what it takes in. The total value produced by the economy is the sum of the values-added by every industry. The expenditure method is based on the idea that all products are bought by somebody or some organisation. Therefore we sum up the total amount of money people and organisations spend in buying things. This amount must equal the value of everything produced. Usually expenditures by private individuals, expenditures by businesses, and expenditures by government are calculated separately and then summed to give the total expenditure. Also, a correction term must be introduced to account for imports and exports outside the boundary. The income method works by summing the incomes of all producers within the boundary. Since what they are paid is just the market value of their product, their total income must be the total value of the product. Wages, proprieter's incomes, and corporate profits are the major subdivisions of income. The output approach The output approach focuses on finding the total output of a nation by directly finding the total value of all goods and services a nation produces. Because of the complication of the multiple stages in the production of a good or service, only the final value of a good or service is included in total output. This avoids an issue often called 'double counting', wherein the total value of a good is included several times in national output, by counting it repeatedly in

several stages of production. In the example of meat production, the value of the good from the farm may be $10, then $30 from the butchers, and then $60 from the supermarket. The value that should be included in final national output should be $60, not the sum of all those numbers, $100. The values added at each stage of production over the previous stage are respectively $10, $20, and $30. Their sum gives an alternative way of calculating the value of final output. Formulae: GDP (gross domestic product) at market price = value of output in an economy in a particular year intermediate consumption NNP at factor cost = GDP at market price - depreciation + NFIA (net factor income from abroad) - net indirect taxes. THE INCOME APPROACH The income approach equates the total output of a nation to the total factor income received by residents of the nation. The main types of factor income are: Employee compensation (= wages + cost of fringe benefits, including unemployment, health, and retirement benefits); Interest received net of interest paid; Rental income (mainly for the use of real estate) net of expenses of landlords; Royalties paid for the use of intellectual property and extractable natural resources. All remaining value added generated by firms is called the residual or profit. If a firm has stockholders, they own the residual, some of which they receive as dividends. Profit includes the income of the entrepreneur the businessman who combines factor inputs to produce a good or service. Formulae: NDP at factor cost = Compensation of employees + Net interest + Rental & royalty income + Profit of incorporated and unincorporated firms + Income from self-employment. National income = NDP at factor cost + NFIA (net factor income from abroad) - Depreciation. THE EXPENDITURE APPROACH The expenditure approach is basically an output accounting method. It focuses on finding the total output of a nation by finding the total amount of money spent. This is acceptable, because like income, the total value of all goods is equal to the total amount of money spent on goods. The basic formula for domestic output combines all the different areas in which money is spent within the region, and then combining them to find the total output. GDP = C + I + G + (X - M) Where: C = household consumption expenditures / personal consumption expenditures I = gross private domestic investment G = government consumption and gross investment expenditures X = gross exports of goods and services M = gross imports of goods and services Note: (X - M) is often written as XN, which stands for "net exports"

PRICE ELASTICITY FOR MANAGERIAL DECISION MAKING Price Elasticity is a measure of the responsiveness of one variable to changes in some other variable. For example, advertising elasticity is the relationship between a change in a firm's advertising budget and the resulting change in product sales. Economists are often interested in the price elasticity of demand, which measures the response of the quantity of an item purchased to a change in the item's price. Elasticity measures are reported as a proportional or percent change in the variable being studied. The general formula for elasticity, represented by the letter "E" in the equation below, is: E percent change in x / percent change in y. Elasticity can be zero, one, greater than one, less than one, or infinite. When elasticity is equal to one, there is unit elasticity. This means the proportional change in one variable is equal to the proportional change in another variable, or in other words, the two variables are directly related and move together. When elasticity is greater than one, the proportional change in x is greater than the proportional change in y and the situation is said to be elastic. Inelastic situations result when the proportional change in x is less than the proportional change in y. Perfectly inelastic situations result when any change in y will have an infinite effect in x. Finally, perfectly elastic situations result when any change in y will result in no change in x. A special case known as unitary elasticity of demand occurs if total revenue stays the same when prices change. HELPS FOR MANAGERIAL DECISION MAKING Economists compute several different elasticity measures, including the price elasticity of demand, the price elasticity of supply, and the income elasticity of demand. Elasticity is typically defined in terms of changes in total revenue since that is of primary importance to managers, CEOs, and marketers. For managers, a key point in the discussions of demand is what happens when they raise prices for their products and services. It is important to know the extent to which a percentage increase in unit price will affect the demand for a product. With elastic demand, total revenue will decrease if the price is raised. With inelastic demand, however, total revenue will increase if the price is raised. The possibility of raising prices and increasing dollar sales (total revenue) at the same time is very attractive to managers. This occurs only if the demand curve is inelastic. Here total revenue will increase if the price is raised, but total costs probably will not increase and, in fact, could go down. Since profit is equal to total revenue minus total costs, profit will increase as price is increased when demand for a product is inelastic. It is important to note that an entire demand cure is neither elastic or inelastic; it only has the particular condition for a change in total revenue between two points on the curve (and not along the whole curve). Demand elasticity is affected by the availability of substitutes, the urgency of need, and the importance of the item in the customer's budget. Substitutes are products that offer the buyer a choice. For example, many consumers see corn chips as a good or homogeneous substitute for potato chips, or see sliced ham as a substitute for sliced turkey. The more substitutes available, the greater will be the elasticity of demand. If consumers see products as extremely different or heterogeneous, however, then a particular need cannot easily be satisfied by substitutes. In contrast to a product with many substitutes, a product with few or no substituteslike gasolinewill have an inelastic demand curve. Similarly, demand for products that are urgently needed or are very important to a person's budget will tend to be inelastic. It is important for managers to understand the price elasticity of their products and services in order to set prices appropriately to maximize firm profits and revenues.